# Impact Of Compensation System On Employee Performance Management Essay

Employees are the assets of any organization. This research study deals with identifying the impact of compensation system on employee performance. Organizational productivity depends on the employee’s performance. If employees problem are addressed properly organizational productivity will surely increase. This study depicts the relationship of variables as job performance of employees with performance appraisal, job security, reward system, job satisfaction, organizational productivity, employee turnover. Due to these variables, it is easy to identify the common problems of employees in organization. Proper management of employees by giving them incentives, and reward system and also showing concern with their work life balance proves to be productive for an organization. Providing creative environment in the organization can enhance their skills. In this regard HR department plays a very vital role in many organizations solving the issues of employees and organizational growth. Organizational productivity mainly depend on the commitment of employees, this commitment is made strong when their will be less turnover rate and soft approach is applied with employees.

Key words: (1) Soft approach, (2) Commitment, (3) Employee Turnover, (4) Reward system.

## 1.1 Objective of Research Study:

There are two main objectives of these research proposals which are;

1) To identify the various compensation system issues that affect employee performance.

2) To examine the relationship of compensation system and employee performance.

## 1.2 Problem Statement:

While studying all the 20 articles it is identified about different issues and problems facing by employees in the organizations like employees monitoring, their work life balance, training, etc. These factors affect the organization in great way because organization performance greatly relates with employee performance .This research proposal is identifying those Factors which affect the performance of employees. The problem statement can be this “what are the Consequences of compensation system issues on the employee performance of a organization”? Job security, promotion and salary are the main problems related to employees performance issues, discouraging them working effectively.

## 1.3 Significance of study:

These articles indicate the significance about how important is the employees for any type of Organization that is either the public sector or the private. Employees are the assets of any organization. If employees are considered as the most valuable identity of organizations than Issues considered in these articles like job security, salary and promotion issues can be overcome. As employees will be given the importance than in return they will work with full devotion which will result in the great performance of organizations.

## 2.0 Literature Review:

(Ilhaamie Abdul Ghani Azmi; 2009) investigated the relationship between the compensation and service quality because in Malaysia there were a lot of complains by the public sector due to the delay of service. This suggests that service quality is not being delivered as anticipated by customers. So when compensation system being offered in the public sector over the System Saraan Malaysia (SSM), which aims to generate competent workers who are responsive to customers’ demands by given that quality services, one would expect that there would be an enhancement in the general quality of the services rendered. (Chang, 1996) For organizations compensation is a cost or expenses, as well as a central tool to attain competitive advantages. Within society, compensation not only influences wealth sharing, but also symbolizes social equity and justice. Therefore, the variety of implications and influences of compensation is profound (Lin, 2000) A compensation system is an encouragement design whereby the contribution of employees is returned. An effective compensation system can stimulate employees to work harder, thus increasing productivity and enhancing job performance. (Ponnu and Chuah; 2010) embrace a performance reward, work reward, year-end reward, full attendance reward, proposal reward and merit reward. He proposed these rewards just because of the employee’s attention towards work. Following Robbins (1992), this study considers compensation system plan as based on three factors: job-based pay, performance-based pay and skill-based pay. These three factors are described by him. Job-based pay: Organizations make a decision on the relative value of job-based pay. The criterion of pay design comprises internal equity, job attributes, difficulty and dependability. The theoretical foundation of job-based pay is the equity theory of organizational performance, which focuses on inner equity. According to equity theory, employees will measure up to their contribution and return with that of other employees and attempt to even out any inequity. Skill-based pay: as well referred to as knowledge-based pay, is based on the skills of employees. Basically, it means that employees are paid in a different way according to their skills, education and capabilities. In past years, skill-based pay has been greatly valued by managers. Performance-based pay: A performance-based pay plan is a flexible compensation system that considers justice and individuals’ different demands, and provides suitable incentive for work ended. Although this design increases the cost of enterprises, the paybacks are significantly more than the generally cost. When employees’ needs are measured and their learning motivation is improved, they work harder and are more reliable to their companies. Thus, employer and employee consistency is strengthened. Hughes and Wright (1989) suggested that in the past, when organizations planned compensation systems, the managers treated compensation as assess to reward and discipline employees’ behavior. In the modern environment, non-management factors, such as employees’ values and their consciousness of equity should also be measured. In this way, the compensation strategy of the organizations can draw, keep and arouse talent, while also convention their own demand for market competition and the achievement of strategic goals. Locke (1976) proposed the Value theory, and suggested that employee fulfillment does not refer to individual wants, but is linked to individuals’ wants, needs or values. If employees are well-paid, have a good quality work environment and endorsement opportunities that meet their work values, employees will be pleased. In order to apply competency-based pay, a few circumstances have to be fulfilled. Firstly, competency criteria used should be well researched, designed, experienced and understood (Armstrong & Brown, 1998). They also must be demonstrable as the basis of pay. Such a exhibition may be effected by score the competencies demonstrated (in the form of behavior or events taken or tasks completed) as desired by the organization on a given scale. Furthermore, other practices such as routine management (Heneman & Ledford, 1998) career development should be implemented first, to successfully address issues regarding this type of pay (Zingheim & Schuster, 2003). It also must be watchfully matched with the goals, culture and political reality of the organization. Locke (1973) suggested that factors that determine employees’ job satisfaction can be alienated into two basic categories: work events and behavior. He indicated that job satisfaction is the relations between these two essentials. Work actions include the work itself, compensation and the working surroundings; behavior includes the actors and others who move in and out of the organization. One competency-based human resource perform is competency-based pay. Competency-based pay is a technique that determines the amount an individual is paid based on capability or performance (PSDM, 2004) (Rhokeun Park; Eileen Appelbaum ; Douglas Kruse 2010 )stated that:” The effects of employee participation and group incentives on organizational dedication and turnover purpose were examined using data from a review of over 4,000 employees in 29 manufacturing companies. Using the mediated restraint model, we investigate the moderate role of capital intensity on the associations between employee participation and group incentives and these outcomes, and the mediate role of organizational loyalty on the effects of employee participation and group incentives on turnover purpose. The findings exposed that employee participation is more efficient in capital-intensive companies than in labor-intensive companies, but assembly incentives are more successful in labor-intensive companies

## 3.0 Methodology:

## 3.1Theoretical Model:

Promotion

Employee performance

Job security

Salary

## 3.2 Variable Explanation:

## Job Promotion:

Promotion has a positive relationship with employee performanceÂ (Manash R. Ray, Marshall A. Geiger and Narayan S. Umanath, 1996; Eisenhardt, 1988; Fein, 1976; Lawler, 1971, 1981; Pearce et al., 1985; Rubery, 1995; Gerhart, 2000; Gomez-Mejia and Balkin, 1992; Lepak and Snell, 2002) promotionÂ is the improvement of an employee’sÂ rankÂ or position in organizationalÂ hierarchyÂ structure. Promotion may be an employee’s reward for good quality performance, i.e., positive appraisal. Before a company promotes an employee to a meticulous position it ensures that the person is able to grip the added responsibilities by viewing the employee with interviews and tests and giving them training or on-the-job knowledge.

## Job Security:

Job Security has a positive relationship with employee performanceÂ (Manash R. Ray, Marshall A. Geiger and Narayan S. Umanath, 1996: Lawler 1981) Job securityÂ is the possibility that an individual will maintain his or herÂ job; a job with an elevated level of job security is such that a person with the job would have a small possibility of becomingÂ unemployed. Factors disturbing job security Job security is dependent onÂ economy, prevailing business situation, and the individual’s personal skills. It has been establish that people have more job security in times ofÂ economic expansionÂ and less in times of aÂ recession.

## Salary:

Salary has a positive relationship with employee performance (Ledford, 1995; Risher, 2000; Risher, 2000; Zingheim & Schuster, 2003; Lanciaux, 1990; Melessike, 1995; Naro, 1991; Roussel and Heneman, 1997; Williams, McDaniel, and Nguyen 2006). It is a type ofÂ remunerationÂ paid periodically by anÂ employerÂ to anÂ employee, the sum and occurrence of which may be precise in an employment contract. It is contrasted with pieceÂ wages, where each job, hour, or other unit is paid unconnectedly, rather than on a permanent periodic basis.

## 3.3 Data Collection:

The data for the research was collected through questionnaires from the employees of UN, Nadra and duniya news. The questionnaire contained total of 17 questions on the 3 independent and 1 dependent variables. The data was collected by randomly distributing the 50 questionnaires among the students and then collecting the filled questionnaires. Different employees fill these questioners on the basis of their knowledge and experiences. This data collection process was conducted in 2 days.

## 3.4 Sampling:

The sample for this research data collection was 50 randomly selected employees of UN, Nadra,Pmo and duniya news. The purpose was to generalize the result of the research to the vast population who have provided there data to any kind of database. The sampling technique utilized for the purpose of sampling was simple random sampling as we randomly selected the employees who filled the self administered questionnaires.

## 4.0 Data analysis:

The data analysis techniques utilized in our research are: Reliability analysis, Descriptive analysis, correlation analysis and Regression analysis. Initially we collected data on 17 questions for the four variables. The independent variables Job promotion, Job security and salary questions were 4, 3 and 3. The dependent variables Employee performance questions were 7.

## 4.1 Reliability analysis:

## Variable

## Cronbach’s alpha

## Employee Performance

## Job Promotion

## Job Security

## Salary

.815

.665

.747

.782

Table 1; Reliability analysis

Reliability is the fact that a scale should consistently reflect the construct it is measuring. In other words reliability is that other things being equal, a person should get the same score on a questionnaire if they complete it at two different points in the time. We can also say reliability to be that two persons, who are the same in terms of construct being measured, should get the same score. The main idea is that set of items should produce results consistent with the overall questionnaire. In a reliable scale the Cronbach’s alpha should not be less than .65. Since the Cronbach’s alpha for all our scales are greater than .65 so we can say that our scale is reliable.

For salary scale the Cronbach’s alpha is .782 and the number of item is 5. Since the Cronbach’s alpha for salary scale is above .65 so we can conclude it to be reliable.

For Job security scale the Cronbach’s alpha is .747 and the number of item is 6, since the Cronbach’s alpha for database security scale is above .65 so we can conclude it to be reliable.

For Job promotion the Cronbach’s alpha is .665 and number of item is 3, since the Cronbach’s alpha for job promotion is above .65 so we can conclude it to be reliable.

## 4.2 Descriptive analysis

## Gender

## Respondents

## Male

## Female

## Total

44

6

50

Table 2; Gender analysis of respondents

The analysis of respondent revealed that the questionnaires were filled in majority by males. The reason for this majority of male respondent was that male employees were easier to approach than female. Despite of the majority of male respondent we can generalize our finding to the general population because both male and female face the same issues of compensation system.

## 4.2 Descriptive analysis:

## Descriptive Statistics

N

Minimum

Maximum

Mean

Std. Deviation

Variance

Skewness

Statistic

Statistic

Statistic

Statistic

Statistic

Statistic

Statistic

Std. Error

EP

50

1.00

4.83

3.1967

.85561

.732

-.521

.337

S

50

1.00

5.00

3.2040

.85284

.727

-.732

.337

JS

50

1.25

4.88

3.2933

.78021

.609

-.657

.337

JP

Valid N (listwise)

50

1.15

4.79

3.1467

.90140

.601

-.630

.337

The descriptive analysis describes the overall characteristics of the data collected. The descriptive analysis table above described the characteristics of data collected on 17 items. The descriptive analysis reveal the number of respondent for each item, the range of the data collected, the minimum and the maximum value of the data collected, the mean of the data, the standard deviation of the data, the variance and Skewness of the data collected. The number of respondent for all items is 50, the range is 4 and the minimum value and maximum value for all is 1 and 5 respectively.

## 4.3. Correlation analysis:

A correlation tells how and to what extent two variables are linearly related. The correlation is used when two variables that are quantitative in nature and are measured on a scale that is approximately interval scale. Correlation shows whether there is a relationship between the two variables and whether one variable is caused due to the other. The significance is the p-value that tells us the probability we would expect our result given the null hypothesis is true. If our p-value is less than alpha – .5 – we would reject the null hypothesis and conclude that there is a relationship between the two variables under study.

## Correlations

EP

S

JS

JP

Pearson Correlation

EP

1.000

.647

.477

.882

S

.647

1.000

.619

.619

JS

.477

.619

1.000

.397

JP

.882

.619

.397

1.000

Sig. (1-tailed)

EP

## .

.000

.000

.000

S

.000

## .

.000

.000

JS

.000

.000

## .

.002

JP

.000

.000

.002

## .

N

EP

50

50

50

50

S

50

50

50

50

JS

50

50

50

50

JP

50

50

50

50

In the above table correlation analysis for employee performance and salary is shown. The correlation between the employee performance and salary is .647, which is semi-strong positive correlation. The p-value is .000, this consistent with the correlation. The p-value is less than alpha therefore it is statistically significant. Thus we reject the null hypothesis and conclude that there is a relationship between employee performance and salary issue.

The correlation between the employee performance and job security is .447, which is semi-strong positive correlation. The p-value is .000, this consistent with the correlation. The p-value is less than alpha therefore it is statistically significant. Thus we reject the null hypothesis and conclude that there is a relationship between employee performance and job security issue.

The correlation between the employee performance and promotion is .882, which is semi-strong positive correlation. The p-value is .000, this consistent with the correlation. The p-value is less than alpha therefore it is statistically significant. Thus we reject the null hypothesis and conclude that there is a relationship between employee performance and promotion issue.

## 4.4. Regression analysis:

A regression is typically used to predict a dependent variable with an independent variable. Regression analysis is closely related to correlation analysis. In this research study the researcher is interested in whether compensation system was related to employee performance. Whether there is a correlation is answered by correlation analysis. In this research simple regression is applied on two models.

## 4.4.1. Model summary

## Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

Change Statistics

R Square Change

F Change

df1

df2

Sig. F Change

1

.895a

.802

.789

.39342

.802

61.920

3

46

.000

a. Predictors: (Constant), JP, JS, S

## 4.4.2. ANOVA

## ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

28.752

3

9.584

61.920

.000a

Residual

7.120

46

.155

Total

35.872

49

a. Predictors: (Constant), JP, JS, S

b. Dependent Variable: EP

Table 8; ANOA model 1

The above table shows the ANOVA analysis for employee performance and compensation system. According to the box the p-value is less than .001. Since the p-value is less than alpha so we can reject the null hypothesis and conclude that there is a relationship between employee performance and compensation system issue. The F-value is greater than 12 so it supports our conclusion drawn by the p-value.

## 4.4.3 Hypothesis:

## Hypothesis

## Accepted/Rejected

Ho= There is no relationship between salary and employee performance.

H1= There is a relationship between salary and employee performance.

Rejected

Accepted

Ho= There is no relationship between Job security and employee performance.

H1= There is a relationship between job security and employee performance.

Rejected

Accepted

Ho= There is no relationship between Job promotion and employee performance.

H1= There is a relationship between job promotion and employee performance.

Rejected

Accepted

Table 12; Hypothesis

According to the regression result the p-value is less than .001. Since the p-value is less than alpha so we can reject the null hypothesis and conclude that there is a relationship between salary and employee performance. The F-value is greater than 12 so it supports our conclusion drawn by the p-value.

According to the regression result the p-value is less than .001. Since the p-value is less than alpha so we can reject the null hypothesis and conclude that there is a relationship between job security and employee performances. The F-value is greater than 12 so it supports our conclusion drawn by the p-value.

According to the regression result the p-value is less than .001. Since the p-value is less than alpha so we can reject the null hypothesis and conclude that there is a relationship between job promotion and employee performances. The F-value is greater than 12 so it supports our conclusion drawn by the p-value.

## 4.5 Conclusion:

In this research paper the impact of compensation system on employee’s performance was considered and prioritized. And this research paper shed lights on the importance of employee for any organization. Variables which are taken in this article are employee’s performance which is the depended variable and job security, salary and job promotion are independent variables. There is a positive relationship between salary, job promotion, job security with employee performance the correlation b/w independent variable and dependent variable which we have taken is positive which shows the relationship in same direction b/w them p-value also shows the relationship b/w variables.

Researchers always have made efforts to identify the employee issues in organizations. organizational productivity can’t be increased without employee performance .one way of improving the organizational productivity and employee performance is to improve the salary and providing employees job security and others factors which are involved in increasing the productivity of employee and organizations like working environment, and other motivational tools R- square values shows the variation in the employee issues through compensation system. We are agreed with pas researchers that employees commitment with the organization can be only made possible by giving them what they demand, but in ethical and legal manners. Variable that we have discussed in this research study are if addressed properly then there will be less turn over in the organization. Employee’s honesty with their works can only be possible through soft approach; in this regard efforts should be made in helping work life balance.

Finally this research study shows that more the relation of employer with employee and the relation with the employees are managed effectively, and then the organization will certainly grow. Organization in private sector becomes more effective because they use HR management in better way, but in public sectors personnel management is implemented, which don’t work for the beneficial of employees.